Foundation

Repeal the Individual Mandate

Senate Finance Chairman Orrin Hatch (R-UT) added a repeal of the Affordable Care Act’s (ACA) individual mandate to the Tax Cuts and Jobs Act. This addition will eliminate a compliance burden for taxpayers, and enable lawmakers to further reduce tax rates while making it easier to navigate the bill through Senate budget rules.

The individual mandate uses the tax code to compel people to purchase health insurance coverage or pay a penalty officially named in Orwellian fashion as the “Shared Responsibility Payment.” While selling the ACA to the public, President Obama and others argued that the mandate wasn’t a tax, but then when before the Supreme Court they argued that it was a tax so that it would be deemed constitutional under a unique application of the Commerce Clause. There’s a long history of assessing “sin taxes” on items like cigarettes and alcohol as a disincentive to purchase such goods, but the mandate represents an unprecedented expansion of government’s power to force people to enter the insurance market.

In the Senate’s tax reform bill, taxpayers would see relief from the mandate starting in 2019. This will ease tax compliance burdens for many filers. The tax-penalty was less of a burden when it first kicked in, but has worsened over the following years. In 2014, the penalty was the larger of $95 per family member, or 1 percent of their income. But by 2017, it spiked up to the larger of 2.5% of your total household adjusted gross income, or $695 per adult and $347.50 per child. Mercifully, the maximum payment is capped at $2,085.

Initially, many people decided to ignore the mandate and pay the tax penalty instead. In 2014, the first year it was in effect, 8 million people paid the fine, with an average penalty of $210. But as the cost went up, so did compliance. In tax year 2015, the IRS collected $3 billion in fines as roughly 6.5 million opted not to obtain health coverage and were penalized an average of $470. Additionally, 12.7 million filers received an exemption from the coverage mandate for reasons of economic hardship or other permitted exceptions, such as being incarcerated.The good news is that filers won’t end up in jail for not paying the penalty. The ACA limits the IRS’s ability to collect the tax. There are no liens or criminal penalties for people who don’t voluntarily comply. Instead, the IRS will hold back the amount of the fee from any future tax refunds.

Taxpayers will face a new hassle due to the individual mandate this year. In the run up to the next tax filing season, the IRS announced that it will no longer accept any forms filed electronically that do not include verification that “taxpayer and each member of their family either has qualifying health coverage for each month of the year, qualifies for an exemption, or makes an individual shared responsibility payment when filing their tax returns.” This new policy seems to run counter to President Trump’s executive order “to minimize the unwarranted economic and regulatory burdens” of the ACA.

The Congressional Budget Office has reported that repealing the mandate would reduce the deficit by $338 billion through 2027. These estimated savings could be used to further lower rates in the tax reform package, and to make it easier to comply with restrictive Senate budget rules. A potentially complicating factor is that CBO also projected that 13 million fewer people would be covered by health insurance. They are not being booted from health insurance, as some have claimed. Instead, they are projected to make voluntary decisions to forgo coverage, even when the coverage is heavily-subsidized.

However, although CBO’s figures are used to determine the net score of legislation for compliance with budget rules, its cost estimates are often off the mark. This particular estimate is based on an assumption of the effectiveness of the individual mandate, which CBO itself notes is “inherently imprecise because the ways in which federal agencies, states, insurers, employers, individuals, doctors, hospitals, and other affected parties would respond to it are all difficult to predict.” As Avik Roy points out, a large share of the loss of coverage includes people dropping out of Medicaid, even though the program “is effectively free to the end-user.”

Regardless of any questions concerning CBO’s numbers, the impact of the individual mandate falls overwhelmingly on those earning less than $50,000. Whether it is repealed through tax reform now or at a later date when health care is revisited, the individual mandate tax is an overreach of the government’s coercive power and ought to be scrapped.

NTU Foundation

Our Mission

Founded in 1973, National Taxpayers Union Foundation (NTUF) is a non-partisan research and educational organization dedicated to showing Americans how taxes, government spending, and regulations affect them. Through difference-making data, analysis, and commentary, we empower citizens to engage in the critical policy debates of our time – and hold elected officials accountable.